We have investigated the morphological evolution of strained films during growth. Novel Monte Carlo studies, which incorporate linear elasticity, have been performed to simulate film growth with misfit. These studies demonstrate the onset of islanding for sufficiently large misfit. We present an analytic calculation which shows that from the onset of deposition the films are energetically unstable to large-scale islanding. We argue that the kinetics ultimately determines the surface morphology. Dislocations are not necessary for surface lattice relaxation. Support for this picture is inferred from experimental results on a number of strained growth systems.